marketplaces

There’s actually 2 levels of trust here. The first is knowing and trusting the person you’re buying from. And if you don’t know who they are, then you must move on to the second level of trust, which is do you know and trust the platform the person is using.

The ability to have “second order trust” is one of many reasons the internet has made so many institutions obsolete. Take the SEC’s role in policing private companies that market themselves to potential investors. This was sensible consumer protection back when the government was arguably the only organization that had the means and incentives to identify fraudulent investment schemes. But today we have many examples of websites that’ve built mechanisms for reliably tracking the reputations of individuals and organizations. This means the SEC could – in theory – make the unit of regulation platforms instead of investors and startups (something the crowdfunding bill being considered by Congress seems to do at least in part), which in turn could unleash a new wave of innovation among crowdfunding platforms and crowdfunded startups.

Over the past few years, a bunch of web-based marketplaces have gotten popular – Etsy, Kickstarter, AirBnb, to name a few. Many of these business ideas had been tried before but are succeeding only now.

When a trend like this emerges, it’s always interesting to ask “why now?” For example, for almost a decade, entrepreneurs tried to create video sharing services like YouTube, but only succeeded when certain key dependencies – broadband, digital video cameras, a version of Flash that “just worked” – became widespread.

I asked Roelof Botha the “why now” question regarding web-based marketplaces. He said something I thought was really interesting: marketplaces depend on trust, and trust requires knowing the reputation of a prospective counterparty. Today, for the first time, you can get background information on almost any prospective counterparty by searching Google, Facebook etc. Or put more simply: we finally have an internet of people.